With property prices remaining subdued in inner Sydney, now is a great time to consider an investment property. This can be in addition to your own home, or as a way of getting into the property market with the security of a tenant and rental income while you live elsewhere.
Buyers are now in a better position than they have been in some time. Therefore, it’s worth considering an investment property as an alternative to shares or a savings account.
Tax deductions to know about
If you are thinking of investing, and wondering what you can claim against your tax, read on for a handy checklist.
All interest you pay on your investment property mortgage is tax deductible.
This is an area that confuses many investors. In a nutshell, wear and tear on your property and its fittings may be tax deductible. This will depend on when your property was built and whether you have new or second-hand fittings, so be sure to get advice. You can claim depreciation over time of appliances in your investment property and ordinary wear and tear, and also depreciation of the dwelling itself, depending on whether you bought it brand new and how old it is. You can appoint a quantity survey to provide you with a ‘depreciation schedule’ for all fixtures and fittings at tax time.
Repairs and maintenance
You can deduct the cost of any work you have done on your property, such plumbing or electrical works. You can also deduct the cost of new curtains or carpets. However, you must deduct the cost of larger works, such as a new kitchen, over a number of years. The tax office classes initial renovations as capital expenses. This means you can only deduct these from your capital gains when you sell.
You can deduct certain mortgage broker and loan fees associated with buying your investment property over a period of five years, unless they are less then $100. In that case, you can claim them all at once.
Real estate fees
Tax deductions in this area include advertising costs for finding a tenant and ongoing property management fees, plus cleaning costs. Appointing a property manager is a great way to ensure you have the right tenants in the first place, and to have someone handle all ongoing work associated with the property.
This tax deduction applies to apartment blocks and strata properties.
If you take out insurance on your property (which is a good idea) it’s another tax deduction.
Water and council rates
Your tenant will generally pay for ongoing expenses such as water usage, electricity and gas, unless you offer an all-inclusive apartment. But you usually pay water and council rates and these are tax deductible.
You can deduct the cost of renovations. However, these are also capital expenses, so you claim them over a number of years rather than all at once.
You can also claim any costs involved in evicting a tenant. Obviously it’s better to avoid these altogether by getting a good tenant, which is why many property investors will appoint an experienced property manager to screen and interview all potential tenants.
How do you claim tax deductions?
Your property manager will send you an end-of-year statement showing all expenses they have charged. They will also forward you any invoices from tradespeople for your records, which must include an ABN. Keep these, along with bank statements showing your interest payments, and any other expenses associated with your property such as accounting fees or insurance premiums. This will ensure your end-of-year tax return is straightforward.
Other points to consider
Bear in mind that these deductions don’t apply to second properties that don’t generate income. This may include hobby farms, airbnb rentals, or holiday homes, apart from any periods when they are rented. If you do rent out a holiday home periodically, say for two weeks a year, you could deduct a proportion of all expenses to reflect those periods, but nothing more. Your property must be genuinely available for rent for you to claim deductions.
Another factor to consider is what happens if you sell your investment property. If you have made a profit on your property, it will be subject to capital gains tax. This is tax paid on the property’s increase in value, after any deductions such as initial renovation costs and selling fees.
Talk to us
Now is a great time to invest in Sydney—a city that is always attractive to tenants thanks to the employment opportunities and unique lifestyle on offer. If you’re thinking of investing, please sign up for our free guide on Sydney property. We are also happy to talk to you about our property management services and our current listings.